When The End Of Bapcor’s Misery?

Australia | 10:11 AM

Yet another guidance downgrade from Bapcor brings management’s expectation of a second half turnaround into question.

• Bapcor downgrades first half profit guidance by -59%
• Management retains confidence in H2 improvement; FY26 only downgraded -17%
• Focus on balance sheet risk
• Share price de-rating to date means no Sell ratings
• Could there be a white knight suitor timing his move?

By Greg Peel

Bapcor ((BAP)) is Asia-Pacific's leading provider of vehicle parts, accessories, equipment, service and solutions, with the automotive aftermarket the company’s core business. Bapcor’s stock price has fallen -64% since July.

Since peaking around $8.50 in 2021, the share price has now lost close to -79%. To state shareholders are very unhappy is a grave understatement. Bapcor joined the ASX on 24 April 2014. It's IPO issue price was $1.82.

Yesterday, the shares closed at exactly that level.

A profit warning ahead of the company’s FY25 result was the initial culprit, worth around a -30% fall, but this was followed by an October trading update that led to a big drop in consensus forecasts, and another FY26 profit downgrade this week.

Bapcor’s first half underlying profit is now expected to be $5-8m, down from $14-18m, --a -59% downgrade from midpoint-- with the midpoint -65% below consensus. Full-year FY26 underlying profit is downgraded to $39-41m from $44-49m; a -17% downgrade from midpoint, with the midpoint -18% below consensus.

In Morgan Stanley’s view, one of the market's key bull arguments for Bapcor was that despite several downgrades, missed targets and restructures, the core Trade business was proving resilient, and importantly, was the division where most of the value resides.

Now imagine a familiar phrase echoing through the Bapcor headquarters --Houston, we have a problem!-- as the main reason for the latest downgrade was weakness in the Trade division.

Burson experienced a challenging October-November trading period, recording sales declines in Tools & Equipment, partially offset by growth in parts. The company is implementing targeted price reductions to recover market share, and that is putting pressure on margins.

The good news came from Retail. Autobarn saw improved trading in October-November with 1.3% sales growth, supported by a robust Black Friday performance, while both the Specialised Networks and New Zealand segments are tracking in line with expectations.

Given the group's current trading performance and debt position (FY25 pro forma leverage 2.13x), Bapcor is engaging with its lenders to seek an increase to its leverage covenant for FY26 (from 3.0x).

No Problem

Despite the weaker-than-expected update, management’s confidence in an improved second half will be driven by operational improvements driving top-line sales growth, pricing realignment measures, and the realisation of $20m in pre-tax savings from various cost initiatives.

It was a tough first half, UBS suggests, which requires an even bigger half-on-half uplift versus previous guidance given the first half is lower than previously anticipated.

At the midpoint of guidance, excluding the second half post-tax savings initiatives initiated, guidance implies an improvement to $26m from $6.5m and would suggest a first half/second half underlying skew of 20/80%, UBS calculates.

That’s some skew.

Can They Do It?

Management reiterated confidence in a materially improved second half, but Morgans believes the magnitude and timing of this week's downgrade --coming shortly after the October update-- warrants some caution around second half expectations.

Macquarie warns delivering revised FY26 guidance is critical to provide confidence in the underlying earnings base and alleviate any balance sheet concerns, alongside stabilisation of revenue, earnings and market share in the Trade segment.

Citi is unsure whether Bapcor’s price reductions in its underperforming Trade business will deliver improved performance given the customer base typically values other factors, such as relationships, speed of delivery and inventory availability, as the cost of products in many cases is passed through to the end-consumer. This is likely to mean increased downside risk to second half guidance.

As management continues with the process of integrating operating units into the overall business (from previous acquisitions) as well as reviewing operating practices, it continues to find further problems which require write-downs and/or reduced earnings as they stabilise the business.

Canaccord Genuity does not believe anyone can say conclusively this is the last of the identified problems to emerge into negative earnings outcomes. That said, the reviews are nearing completion and investors should hope (and expect) at the conclusion of those reviews there are no further write-downs, impairments, and impacted earnings outcomes.

Canaccord does not expect those reviews to be fully completed until the second half.

In Canaccord's view, it is the operational weakness that should be of greater concern to investors. Trade holds a privileged position within its markets and is now in a position to be losing share (albeit modestly) and margin as it uses some pricing to maintain share -- this is seen as concerning.

The broker's experience in general suggests these types of issues are slower to turn around than expected. Canaccord knows from balance scorecard outcomes staff engagement and morale are low, and expects that is a slow ship to turn.

Canaccord expects it will happen, but is cautious that it is unlikely to improve materially into the second half and FY27.

Citi believes gearing is now more of a concern, with the company having to work with its lenders to increase the debt covenant for FY26. Morgan Stanley also expects the balance sheet to come under greater focus. Morgans shares the concern.

It is unclear to UBS if further risk from legacy issues being discovered in Tools & Equipment business and execution risk around the operational improvements through the second half still exists.

Given these further earnings deteriorations, UBS warns –you guessed it-- investors may perceive risk around balance sheet.

Could there be a white knight?

Given significant share price weakness, Morgans believes renewed corporate appeal may arise.

To that end, Morgan Stanley and UBS are currently on research restriction, having announced in June 2024 they are acting as financial advisors to Bain Capital Private Equity in relation to the proposed acquisition of Bapcor.

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